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Tips for first time property-investors

Posted February 7, 2019byJohn Beal

Many people assume property investors are
rich and carefree.

This is far from true, especially for the
first-time investor.

First time investors are simply everyday
people striving to create a better future for themselves and their families.
They aim to buy property, rent it out in the hope that one day, with smart
management and capital appreciation, they can use the value in that property to
help maintain their living standards into retirement without relying totally on
government assistance.

Surely this is a worthy endeavour.

Here’s some tips to help with making smarter
decisions.

Determine your structure:

Start by considering the taxation implications. Each structure such as trust, superannuation funds, companies or personal names has tax advantages and disadvantages. Before purchasing, consult a good property accountant for structural advice suitable for your circumstances. It can be expensive to change names later.

Know your purpose:

Some invest with a long-term view of security and wealth creation, while others are looking for a short turnaround and a quick profit.

Inexperienced investors who attempt a quick
turnaround frequently fail. They often buy without enough research or
experience, find the costs are higher and the return lower than expected,
leading to quick losses rather than gains. The losses in this sort of venture
can come hard, fast and large. In a booming market, many people move into the
business of flipping, only to see their profits evaporate when the market
turns. If you’re a short-term investor, be careful, do comprehensive research
and start small.

Looking for short-term capital gains is more
speculation than investment. Good long-term property investment is just that —
an investment.

Growth and return:

Two factors often mentioned in property investment are capital growth and rental return.

One myth of capital growth is that property
prices double every seven years. For example, in 1973 the average house price
in Brisbane was $17,500. If house prices had doubled every seven years in 2014
the average price would have been $1,120,000. In fact, it was about half of
that.

Many property investment gurus make money
from seminars rather than property. If a deal sounds too good to be true, then
it probably is. However, when looking for growth two genuine property
investment experts first time-investors should be familiar with are: Margaret
Lomas, who wrote 20 Must Ask Questions for Every Property Investor and Terry
Ryder, who runs hotspotting.com.au.

When looking at income the figure most
quoted is the gross return — that is, the total rent for the year divided by
the purchase price, multiplied by 100 to give a percentage figure.

A property purchased for $500,000 and
renting for $500 a week has a return of 5.2%. That is $500 x 52 = $26,000 /
$500,000 = .052x 100 = 5.2%.

In 2018, interest rates are at record lows,
so the 5.2 per cent return looked attractive.

However, when doing the calculation on an
investment purchase, you should underestimate income and overestimate expenses.
That way, there won’t be any nasty surprises.

Rather than making your purchasing decision
on the gross return, calculate the net return—which takes into account your
expenses. For example, if you allow two weeks a year for vacancies, add
council rates, body corporate costs, agents’ costs, maintenance and insurance.
A 5.2 per cent gross return quickly drops to a less than 4 per cent net return.
This doesn’t necessarily make it a bad investment, but at least you’re making
your decision on a more realistic number.

Don’t buy on trend:

First-time investors should be very wary of buying on an economic trend. For example, the mining boom of the 1990s and early 2000s led many property investors into country towns and regions. While returns and growth were — and there is no other word for it — spectacular, the end of the mining boom saw a significant downturn for residential investments in these areas. The supply of tenants diminished, leading to reduced rental returns; buyers deserted the market, and therefore prices fell significantly.

For first-time investors buying a property
is an exciting and worthwhile venture. There is something comforting about
having an investment in bricks and mortar. Just remember, property investment
is like all worthwhile investments; it takes research, strategy and planning.

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